The Express Train Is Picking Up Steam

Jump aboard with call spreads

Tuesday’s trading session brought good fortune to retail stocks across the board. The retail sales report released Tuesday morning showed that sales in December came in at 0.5%, which crushed the market’s expectation of 0.2%.

Click to Enlarge By the end of the day, the SPDR S&P Retail ETF (NYSE:XRT) had climbed 2% on its highest trading volume in eight months. What’s more, now that the XRT has broken above the resistance zone around $64.30, it can now challenge its all-time highs at $65.47.

Amid the broad retail rally, traders flocked to Express (NYSE:EXPR), driving its shares higher by nearly 24%. The outsized move came after the company said it was raising its earnings forecasts following better-than-expected holiday sales.

Click to Enlarge Since the former Limited Brands‘ (NYSE:LTD) division went public in May 2010, EXPR has taken investors on a volatile ride. After doubling in price from $13 to $26, shares were cut in half last year dropping as low as $10.47. And yet, with the favorable up-gap in late November along with this week’s surge, it appears a resurrection of the beleaguered stock is in full force.

Traders looking for additional upside in EXPR in the coming months could buy the April 17.50-20 call spread. To initiate the position, buy the April 17.50 call while selling the April 20 call for a net debit of 95 cents or better. The max loss is limited to the initial 95 cents and will be incurred if EXPR sits below $17.50 at April expiration. The max reward is limited to the distance between strikes minus the initial debit, or $1.55, and will be captured if EXPR climbs to $20 by April expiration.

With EXPR having already rallied more than 20%, you could consider waiting until some type of pullback develops. This would allow you to buy the aforementioned call spread at a more favorable price.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.